Quality Control That's Out Of Control
MADISON, Wis.-As if CUs did not have enough burdensome regulations to worry about, coming soon to mortgage departments will be a troublesome, three-letter acronym: QRM.
QRM, as proposed by FDIC, would require a 20% down payment on a purchase mortgage and no 60-day delinquencies for potential borrowers on any debt in the past 24 months. It is part of a larger effort to address abuses in the mortgage process, including requiring lenders and securitizers to retain 5% of risk after securitization.
According to Steve Robertson, managing director of PricewaterhouseCoopers, this "skin-in-the-game" concept is supposed to "align the incentives" of issuers of mortgage backed securities and the investors who buy them. "If originators own a stake in the loan, the thought is they will produce better loans, thereby giving investors more confidence," Robertson explained during a webinar hosted by CUNA Mutual Group. "The problem is, the conservative underwriting standards will likely limit availability and increase the cost of mortgage credit to borrowers.
The webinar also featured Joel Luebkeman, director of marketing and product development for CMG Mortgage Insurance Company; Mary Dunn, SVP and deputy general counsel for CUNA and John McKechnie, SVP for Total Spectrum.
Speak Now Or Forever...
Time is running out for CUs to make their voices heard regarding the QRM rule. The comment period has been extended to Aug. 1 from June 10. According to Luebkeman of CMG Mortgage Insurance, it is important for credit unions to let regulators hear how well their high loan-to-value ratio loans are performing. "To get an idea of the scale of transactions that would be affected by the QRM rule, it is estimated 2.7 million borrowers in 2010, or 40% of home loans, would not have met the QRM definition," said Luebkeman. "The proposed rule penalizes credit unions for doing the right thing. Credit unions have delinquency rates that are a fraction of those of banks. Credit unions were responsible in their loan-to-value lending."
The rule is attracting attention in Congress, where several lawmakers filed a letter with regulators stating the proposed rule was the opposite of legislative intent-Congress specifically considered and rejected a 20% down payment requirement, which QRM highlights, Dunn said, adding that the QRM rule easily could become the standard for residential mortgages, and may keep borrowers from receiving loans. "It will create unnecessary barriers to borrowers and will limit credit unions' efforts to tailor loans to serve their members," she said.
McKechnie said it has been clear since the rule was put out in March there would be opposition. He sees "real concern" by both parties regarding QRM. "It is not consistent with the Dodd-Frank Act, it was not well thought out," he said. "The 20% down payment figure has been a touchstone for many people, but the servicing standards also are a problem."
Luebkeman, agreed: "The servicing rules do not foster a level and fair playing field among all financial institutions and mortgage programs."
The rules, Luebkeman continued, create "winners" and "losers." Today, the secondary mortgage market is open, but after QRM, he predicted, some institutions will be positioned to leverage large capital bases to exploit the skin-in-the-game requirement. "The proposed rule could force reliance on a secondary market dominated by a select group of large banks with sufficient resources to hold 5% skin in the game," he said. "This potentially weakens the member relationship with a credit union and future cross-sell opportunities, because large banks would be buying the loans and they would be the ones to have an interface with members."
Congress has been looking to make significant changes to the secondary mortgage market, McKechnie noted, but it "doesn't want the baby thrown out with the bath water. The rules were too loose before, in the opinion of many, but they should not be so restrictive they cut many people out of the market."
Template Letter Available
Luebkeman predicted the capital charges taken on by securitizers to fulfill risk retention requirements would be passed on to CUs-and "undoubtedly at a price far in excess of the actual cost because the securitizers won't do this for free," he said. "In a post-GSE-restructuring world, the QRM definition becomes the de facto conforming loan. I know everybody is busy and has a lot going on, so we drew up some thoughts to help credit unions get their comments together." CMG Mortgage has a template comment letter at: www.cmgmi.com/qrm.